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RETIREMENT ADVICE
How do I prioritize paying off debt and saving for the future? | 1:07

Especially for debt-saddled Millennials emerging from college into the workforce, it can be difficult to decide how to save for retirement while paying back loans. Consumers may fear that prolonging repayment will result in more debt.
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Newslook

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Target date fund managers are continually working to improve returns even as their fundholders 'set it and forget it,' said Fredrik Axsater, Global Head of Retirement Programs for State Street Global Advisors.
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The results may surprise you.

When it comes to financial responsibility, Millennials tend to get a bad rap. Often criticized as lazy, entitled quasi-adults willing to blow their income on fancy coffee and avocado toast, they're the last people you'd think would be on track to retire comfortably. But new data reveals that, apparently, we have things totally wrong.

In a just-released NerdWallet study, Millennial parents, in particular, are outsaving parents of every other generation, and should have the most income once retirement rolls around. Based on these recent findings, if each generation (Millennials, Gen Xers, and Baby Boomers) were to maintain its current savings rate between the ages of 26 and 67, Millennials would end up with over $1 million more in retirement than Boomers and $400,000 more than Gen Xers.

How is this possible? Much of it boils down to impressive savings rates. Of those who are actively setting money aside for the future, workers between the ages of 18 and 34 are socking away a median 10% of their yearly income. Gen Xers aged 35 to 54, meanwhile, are saving a median of 8%, while boomers age 55 and over are contributing a median of just 5%. But while strong savings rates are clearly fueling younger workers' projected success on the retirement front, there's another weapon Millennials have in their arsenal that's giving them a definite edge: time.

Start early to grow your wealth

While it's true that younger workers may be saving at higher rates than their older counterparts, let's remember that they're also, for the most part, earning less as well. So then how can it be that Millennials across the board are on track to outsave Gen Xers and Boomers by $1 million and $400,000, respectively?

It's easy — the answer boils down to compounding. Compounding is the concept of earning interest on interest, and it's what allows savers to turn a series of relatively small contributions into a sizable sum over time. But to best take advantage of compounding, you'll need to start focusing on retirement early on — and that's where so many Millennials are getting it right.

Say your goal is to retire with $2 million. You don't actually need to set aside $2 million of your own money throughout your career to achieve that objective. Rather, if you consistently sock away $600 a month over the course of a 45-year career, and invest that money in a manner that generates a 7% average annual return (which is more than doable with a stock-focused portfolio), you'll end up with just over $2 million by the time you're set to retire. At the same time, you'll have contributed just $324,000 of your own money to make that happen.

Therein lies the beauty of compounding, and it's what's helping younger savers outpace older generations whose savings windows are more limited. Remember, unlike Boomers, Millennials have been urged to save for retirement from the start. Even older Gen Xers didn't have the same urgency to set aside money for the future as today's youngest workers. So if you happen to be relatively new to the working world, you have a real chance to capitalize on what could be a very rewarding opportunity. On the other hand, if you wait too long to start saving for retirement, you may end up disappointed (or, worse yet, cash-strapped) down the line.

The following table highlights the precise trouble with holding off on retirement savings, even if for only a few years' time:

If you start saving $600 a month at age ...

Here's what you'll have by age 67 (with a 7% average annual return)

22

$2.057 million

27

$1.437 million

32

$995,000

37

$680,000

42

$455,000

47

$295,000

52

$181,000

TABLE AND CALCULATIONS BY AUTHOR.

Now, most of these numbers look pretty impressive. For example, retiring with $455,000 (which assumes an initial savings effort at age 42) isn't too shabby a notion. On the other hand, check out the difference between kick-starting your savings efforts at 22 versus 27. By losing out on just five years of contributions, you'll end up with $620,000 less in your nest egg. And that's a lot of money to lose out on, considering it only would've cost you $36,000 out of pocket.

No matter where you are in your career, let all of the above serve as a valuable lesson: The sooner you get moving on retirement savings, the more money you stand to accumulate, and the less it'll cost you to amass that sum. Millennials may not be the most admired generation, but they're clearly doing an outstanding job of saving for the future — and that's something we all ought to applaud.

CLOSE

Study says Americans closing in on retirement now aren't as healthy as prior generations were in their late 50s.
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